MANAGERIAL ACCOUNTING

ASSIGNING COSTS

What is Managerial Accounting?

Financial accounting: Focuses primarily on preparing the

Managerial Financial
balance sheet, income statement, and cash flow statement in Accounting Accounting
accordance with GAAP for use by internal team members as
well as external creditors and stakeholders. for internal use for internal and
external use
GAAP (Generally Accepted Accounting Principles): A set
of rules that standardizes the reporting and recording of does not follow follows GAAP
U.S. companies’ financial data. GAAP

Managerial accounting: Focuses on identifying, measuring, includes future contains mostly

analyzing, and interpreting the production, service, and other projections historical data
operating costs of a business.
often reports reports on the
Manufacturing costs: Costs related to the production of on individual company as a
divisions and whole
goods.
departments
Direct materials: Materials that are physically part of the
product being made that are easily identified as such.
Direct labor: The work required to assemble direct materials
into the finished products.
Manufacturing overhead: Consists of indirect material
costs, indirect labor costs, and other manufacturing costs.
Also called period costs, non-manufacturing costs are costs
that are unrelated to the manufacturing of goods. These
costs fit into two categories:
Selling costs: Costs associated with marketing, selling, and
delivering finished goods to customers.
General and administrative costs cover everything that is
not a direct cost, manufacturing overhead, or a selling cost,
such as executives’ salaries.

Manufacturing costs Non-manufacturing costs

direct manufacturing direct general &

selling
materials overhead labor administrative

indirect indirect other

materials labor manufacturing
costs

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MANAGERIAL ACCOUNTING

Methods of Assigning Costs

Job order costing: Assigns costs to individual units of

inventory. Each piece of inventory may vary in cost.
Process costing: Averages costs over a large number of
inventory units over time, effectively creating a uniform,
predictable cost for each unit of inventory.
Cost driver: The resource that is the primary generator of
overhead costs for a company.
Cost object: The unit of inventory, service, department, etc.
that is being assigned a cost.
Cost pool: A collection of overhead costs.
Predetermined overhead rate: Estimated overhead costs
divided by the estimated total cost driver.
Plantwide costing (plantwide allocation): Assigns
manufacturing overhead using a single cost pool, cost driver,
and overhead rate.
Activity-based costing (ABC): Assigns manufacturing
overhead costs based on the actual resources required by
each production line using multiple cost pools, cost drivers,
and overhead rates.
Absorption costing: Manufacturing overhead is expensed
as, or absorbed by, cost of goods sold (COGS) when
inventory is sold to customers. Absorption costing is required
by GAAP.
Variable costing: Only variable overhead costs are
expensed through COGS. Fixed overhead costs are
expensed every period regardless of how many goods are
produced and sold.
Variable costs are dependent on production. The more
inventory produced, the higher the variable cost.
Fixed costs remain constant regardless of production.

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